Netflix: Anatomy of a Public Marketing Mistake

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ADOTAS – When Netflix CEO Reed Hastings appeared on the cover of Fortune Magazine last year as Businessperson of the Year, few expected that this year would be full of news of a very different sort for the successful media company. As the end of the fourth quarter comes into sight, Hastings will have a brand new set of challenges for 2012 – including overcoming several projected quarters of losses, a shrinking subscriber base and derailed plans for global expansion.

In the Beginning

When Hastings founded the company in 1997, the idea of renting DVDs online and delivering them through the mail was novel, to say the least. Netflix ended up toppling Blockbuster and other giants of the rental industry. Blockbuster went bankrupt, while Netflix grew to 24 million customers. After becoming the dominant rental service, Netflix, led by Hastings, tackled another industry-changing innovation – streaming media. For less than half of what people were paying for premium television services, subscribers now had access to hundreds of thousands of DVDs through the mail and thousands of hours of movies through computers, home TVs and other personal media.

For many years, it looked like Netflix was unbeatable. Its overwhelming popularity continued to grow and led to an all-time stock high of $304.79 per share on July 13th. But within just a few short weeks, all that changed due to some poor choices and re-branding missteps.

Change Without Communication

In mid-July, an announcement on the official Netflix blog spelled out the company’s new DVD-and streaming-only plans. Rather than pay one price for both services, subscribers would be billed twice. The price change represented a 60 percent increase for many users who were getting the DVD-plus-streaming plan. Before the changes, these users would be paying $9.99 for both services. After the increase, their price would be $17.99 per month. Subscribers were not happy, to say the least. The announcement post itself received thousands of angry responses.

Sure, the price increase made sense from a Wall Street point of view. After experiencing years of market dominance, Netflix was poised for some deflation. Analysts theorized that the stock price was overvalued, that it was based mainly on Hastings’ reputation as an innovator and visionary. In addition, early content deals that provided streaming media for their industry changing service were going to expire. Content costs were going to increase from $3.5 billion from $2.4 billion in the next few years — and customers were already grumbling about the limited choices on their streaming service.

The price increase would also help support Netflix’s continuing expansion plans. During 2010 and early 2011, the company expanded to 43 countries in Latin America and the Caribbean, and it had planned an expansion into the United Kingdom and Ireland.
But from the consumer’s point of view, the changes were unwarranted and unnecessary. In the radically transparent marketplace, Hastings and Netflix had committed the ultimate sin – not listening to or considering their customers.

Too Little, Too Late

To make matters worse, before the dust settled on the rate increase news, Hastings issued a “half-apology” that explained the reasons behind the price split and increase: a new “analog” DVD service that would be separate from Netflix. Instead of logging into one platform and having access to streaming and DVDs, customers would need to visit two websites and have two separate charges.

The new DVD-only service, Qwikster, was met with about as much enthusiasm as the rate increases themselves. Within just 90 days, Netflix lost 800,000 subscribers and $12 billion in market value. The company’s stock plunged 70 percent by October, and at that time, Hastings announced, not surprisingly, that they’d be abandoning the Qwikster concept.

The Fallout

Now, Netflix is faced with trying to maintain its current subscriber base while also going through with the expansion to international markets. As a result, the company is eliminating jobs in the fourth quarter. They also stopped share buybacks, on which they had spent nearly $1 billion since 2007.

Analysts question whether or not Netflix should continue expanding internationally. Online video viewing hasn’t caught fire, and they theorize that revenue could be better spent on maintaining the company’s smaller U.S. market share. But as CEO, president and chairman of the board, Hastings’ vision is being carried through. He told the New York Times that while the Qwikster concept became a sign of the company’s failings, expanding abroad will cause streaming video demand to take off internationally.

As a result of Netflix’s fumbles, the company now has about a quarter of its previous $4.2 billion market capitalization. With the competition closing in and taking advantage of this exec’s gaffes, Netflix will need to fight hard in order to gain back just a fraction of what it had before.

3 COMMENTS

  1. Yeah it’s going to be hard for Netflix to recover from this huge misstep. Especially considering that other services have stepped up to fill the void. I actually cancelled my Netflix subscription because it was becoming such a pain. I didn’t really need it anyway, being that I’m a long time subscriber of DISH Network, and more recently an employee as well. I get most of my entertainment through my dish, still though, it’s nice to have additional options. Luckily the Blockbuster Movie Pass was released within a couple weeks of me cancelling Netflix, and it not only gave me similar options, it’s giving me more choices than I ever had before. For one thing it has video games, which is a huge benefit to me. And it has the option for in-store exchanges (something else Netflix doesn’t have). So I certainly haven’t regretted my decision, and I bet there are plenty of others like me.

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